9 financial-sector-development-and-poverty-reduction
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  • 1. Global Journal of Management and Business Research Volume 11 Issue 5 Version 1.0 April 2011 Type: Double Blind Peer Reviewed International Research Journal Publisher: Global Journals Inc. (USA) Print ISSN: 0975-5853Financial Sector Development And Poverty Reduction By Hafiz Ghufran Ali Khan, Abdul Zahid Khan, Arif Ahmad, Dr Awais E Siraj International Islamic University Islamabad Pakistan.Abstracts - Financial sector development is an effective instrument that can bring reduction inpoverty. Financial sector can be developed by four different ways, by improving efficiency of thefinancial sector, by increasing range of financial sector, by improving regulation of the financialsector and by increased accesses of more of the population to the financial services.Forestimating effect of financial sector development on poverty we divided financial sector into foursectors, Banking sector, Insurance companies, Stock market and Bond market. Gini= f (Bankingsector, Insurance companies, Stock market and Bond market) For banking sector, we usedvariables, central bank assets to GDP, deposits money banks assets to GDP, bank deposits,concentration, overhead costs and net interest rate. For insurance company we used variablenon life insurance, to capture the effect of stock market variable stock market turnover ratioused.For bond market both market capitalization to GDP and public bond market capitalizationto GDP are used.This study attempts to make analysis of the relationship between financialsector development and poverty for different countries. Growth depends on financial sectordevelopment and poverty depends on growth, here the negative relation of poverty and financialsector development tested.Keywords : Financial Sector, Poverty Reduction, Growth, Estimating Effects, NegativeRelationship.Classification : GJMBR-B Classification: JEL Code: I32,I38 Financial Sector Development And Poverty Reduction Strictly as per the compliance and regulations of:© 2011 . Hafiz Ghufran Ali Khan, Abdul Zahid Khan, Arif Ahmad, Dr Awais E Siraj .This is a research/review paper, distributedunder the terms of the Creative Commons Attribution-Noncommercial 3.0 Unported Licensehttp://creativecommons.org/licenses/by-nc/3.0/), permitting all non-commercial use, distribution, and reproduction in anymedium, provided the original work is properly cited.
  • 2. Financial Sector Development And Poverty Reduction α β Ψ Hafiz Ghufran Ali Khan , Abdul Zahid KhanΩ, Arif Ahmad , Dr Awais E Siraj April 2011Abstract : Financial sector development is an effective reducing poverty. Financial sector means institutions ininstrument that can bring reduction in poverty. Financial sector the economy, including all wholesale, retail, formal andcan be developed by four different ways, by improving informal outlets which offers financial services toefficiency of the financial sector, by increasing range of consumers, businesses and other financial institutionsfinancial sector, by improving regulation of the financial sectorand by increased accesses of more of the population to the DFID (2004). Financial sector can be developed by fourfinancial services.For estimating effect of financial sector different ways, to improve efficiency of the financial 59development on poverty we divided financial sector into four sector, to increase range of financial sector, to improve Volume XI Issue V Version Isectors, Banking sector, Insurance companies, Stock market regulation of the financial sector and to increaseand Bond market. Gini= f (Banking sector, Insurance accesses of more of the population to the financialcompanies, Stock market and Bond market) For banking services.Financial Sector Development enables the poorsector, we used variables, central bank assets to GDP, to borrow and invest in income enhancing assets. Itdeposits money banks assets to GDP, bank deposits, generates employment, increases income and reducesconcentration, overhead costs and net interest rate. For poverty. It facilitates mobilizing savings for productiveinsurance company we used variable non life insurance, tocapture the effect of stock market variable stock market investments, both physical and human capital andturnover ratio used.For bond market both market capitalization remittances from abroad. Moreover it reducesto GDP and public bond market capitalization to GDP are transaction costs, helps in improving technologicalused.This study attempts to make analysis of the relationship progress which helps in increasing productivity. It canbetween financial sector development and poverty for different also play an important role in reducing risk andcountries. Growth depends on financial sector development vulnerability and increasing the accessibility of Global Journal of Management and Business Researchand poverty depends on growth, here the negative relation of individuals to basic services like health and education.poverty and financial sector development tested.Keywords : Financial Sector, Poverty Reduction, Growth,Estimating Effects, Negative Relationship. II. LITERATURE REVIEW Functions of financial intermediaries as saving I. INTRODUCTION mobilization risk management, acquiring informationP about investment opportunities, monitor borrowers and overty is one of the most prominent problems of facilitating exchange of goods and services help in the whole world. Numerous measures both at accumulation of capital and hence increasing rate of macro and micro level have been taken but it is technological progress McKinon(1973) and hencestill a burning issue of not only developing countries but enhancing economic growth Levine (1997). There is aalso of the developed world. It hurts productive capacity strong linkage between financial sector developmentand there by economic growth of the economy. and economic growth. Financial sector mobilizeFinancial sector development is an effective instrument resources and allocate it to those investment whichthat can bring reduction in poverty. Theory and evidence generate high return. When the financial sector will beshows that Financial Sector Development can impart on efficient and perform these service better the economicpoverty directly, to the extent that it widens access to performance will be better and growth will be improve sofinancial services for the poor, and indirectly through its its ultimate result will be less poverty.By facilitatingpositive impact on growth, which in return help in transaction and providing the credit and other financial product to the poor for getting their basic needs help in αAbout : Lecture of Management Faculty of Management Sciences reduction of poverty DFID,(2004). Banks also provideInternational Islamic University Islamabad Pakistan. loans for education so it leads to human capitalE-mail : hghufran@yahoo.com formation (De Gregorio, 1996). More investment, moreAbout Ω : Lecturer of Technology Management Faculty of Management production and more production first increase theSciences International Islamic University Islamabad Pakistan.E-mail : forzkhan@yahoo.com growth level then decrease the poverty level, it is indirect βAbout : Research Associate International Institute of Islamic impact of banking sector on povertyEconomics International Islamic University Islamabad Pakistan. reduction.According to Hulme. and Mosely (1996) forE-mail : Arif01_eco@hotmail.com sustainable development and poverty reduction we ΨAbout : Chief Executive Officer Genzee Solutions Pakistan. need an efficient financial sector development.MoreE-mail : awsiraj@hotmail.com information about the investment opportunity, managed ©2011 Global Journals Inc. (US)
  • 3. Financial Sector Development And Poverty Reduction. the risk which leads to high expected rate of return. Economic growth is necessary for poverty Getting more information for an individual is very costly. reduction but it must be accompanied by institutional But for financial intermediaries it is less costly and these structure and policy environment up to the extent that institutions are also expert in investment , if an growth impact the poverty level Lipton and Ravallion, individual makes investment it will highly risky and if (1955). Economic growth is needed for poverty investment will be made through financial institutions reduction and it further rely on financial sector which is less risky and more profitable Gurley and Shaw, development but the linkages of financial sectorApril 2011 (1967); Patrick, (1966); Greenwood and Jovanovic, development and economic growth is not so simple, (1990).For an individual it is difficult to monitor there is a need of another channel which could be policy performance of an enterprise. Financial institutions intervention and policies which will create an efficient monitor performance of different enterprises on behalf of and favorable financial market for capital accumulation60 different investor who makes investment on behalf of and technology innovation Collin Kirkpatrick, (2000). these financial institutions. By Monitoring and exertingVolume XI Issue V Version I corporate control, financial institutions can promote III. METHODOLOGY growth and improve the capital accumulation Bencivenga and B. Smith (1991) and the ultimate result For estimating effect of financial sector of it gives poverty reduction. Financial sector can also development on poverty we divided financial sector into play role in the form of fast payment services, more four sectors, Banking sector, Insurance companies, branches, improved remittance services in the field of Stock market and Bond market. Description of this is exchange of goods between household and business given below: that reduces transaction cost, thus it can help to Gini= f (Banking sector, Insurance companies, Stock promote economic growth. market and Bond market ) Financial instability hurt individuals both directly For banking sector, we used variables, central and indirectly. Directly it hurts poor population more as bank assets to GDP, deposits money banks assets to compared to rich, because they are unable to diversify GDP, bank deposits, concentration, overhead costs, net their risk by investing in foreign banks and as they have interest rate. For insurance company we usedGlobal Journal of Management and Business Research less power of negotiation Mc Kinnon (1973). Indirectly variable non life insurance, to capture the effect of stock financial system instability hurt poor by way of growth. market variable stock market turn over ratio used. Financial instability reduces fund available for For bond market both market capitalization to GDP and investment and therefore it further effect the growth rate. public bond market capitalization to GDP are used. Financial instability also effect real exchange rate Following model is prepared for estimation: because the tradable goods (whose prices are Gini=β0+β1CBA+β2DMB+ β3BD+ β4Con+β5OC+ determined by domestic demand and supply) are β6NI+β7NLI+ β8SMT+β9PBM+ β10GBM+µ directly related to credit level (Guillaumont,2005).Janvry A.D.and E. Sadoulet (2000) using data of twelve Where as counties in Latin America from 1970 to 1994, shows that CBA= Central Bank Assets to GDP economic growth depends on financial stability and DMB= Deposits Money Bank Assets to GDP poverty depends on economic growth , and further BD= Bank Deposits added that poor is more vulnerable to cyclical nature of Con= Concentration growth as compare to rich and the negative impact of OC=Overhead Costs recession is more stronger than the positive impact of NI= Net Interest rate expansion on poor. Because the negative effect of NLI= Non Life Insurance pene growth on poor is generally outweigh the positive effect SMT = Stock market turnover ratio in raising income level (Deininger and Squire PBM =Public bond market capitalization to GDP 1966).Economic growth facilitates the migration of funds GBM =Private bond market capitalization to GDP to its best possible use. Recent literature Kirkpatrick(2000) developed another indirect link between financial development and poverty through IV. DATA DESCRIPTION Government intervention. Government intervention in the Data on Financial sector variable is taken from form of financial policies especially credit market Thorsten Beck website policies which favored the borrowers to obtain credit on http://econ.worldbank.org/staff/tbeck . Data on Gini is subsidized rate of interest, it means to adopt the taken from WIID website http://www.wiid gini coefficient, financial liberalization policy (Kirk Patrick 2000).Due to .Due to non availability of time series data we take Financial liberalization the economic benefits are trickle different years data (unbalanced) for different counties down to the lower income group and ultimately reduce in which. the poverty. ©2011 Global Journals Inc. (US)
  • 4. Financial Sector Development And Poverty Reduction. V. EMPIRICAL RESULTS Using Ordinary Least Square (OLS) method, estimated results are presented in the following table. Dependent variable: Gini Coefficient Variable Coefficient Std. Error t-Statistic Prob. Intercept 40.30504 4.647075 8.673206 0 Central Bank Assets to GDP -45.02849 14.6766 -3.068047 0.0028 April 2011 Deposits Money Bank Assets to GDP -16.00554 9.560759 -1.674087 0.0973 Bank Deposits -17.06588 9.629179 -1.772309 0.0794 Concentration 61.61029 36.28138 1.698124 0.0926 Overhead Costs 144.9347 48.77275 2.971634 0.0037 Net Interest rate -15.40079 3.266939 -4.714133 0 61 Non Life Insurance pene 4.750182 2.566572 1.850789 0.0672 Volume XI Issue V Version I Stock market turnover ratio -6.916905 2.548054 -2.714584 0.0078 Private bond market capitalization to GDP -36.46672 6.467128 -5.638781 0 Public bond market capitalization to GDP 6.49047 7.407687 0.87618 0.3831 Table shows that there is negative and highly significant VI. CONCLUSION relation between poverty and central bank assets. Coefficient of Deposits Money Bank Assets to GDP is This study attempts to make analysis of the negative. relationship between financial sector development and Coefficient of concentration is positive which poverty for different countries. Growth depends on means more concentration more poverty. Concentration financial sector development and poverty depends on of banks reduces the number of choices with consumer growth, here the negative relation of poverty and Global Journal of Management and Business Research and it also reduces the number of rivals in banking financial sector development tested.The banking sector sector because banks merge in mega banks. So variable (CBA, DMB and BD) proved the negative concentration inversely effect growth and its primary relation of poverty and financial sector development impact on consumer is not good (Prager, R. and T. because all the banking sector variables are negative. Hannan (1998)) Like the banking sector stock market variables also Coefficient of overhead cost is positive which show the negative relation and they are highly significant means that as overhead cost increases poverty also also. In bond market negative relation between public increases. For improving the performance of financial bond market capitalization to GDP and poverty found. institution it is necessary to fairly allocate the overhead With the improvement of the stated variables of banking, cost such as utilities, computer usage, space and stock and bond market poverty decreased. Apart from supplies, more overhead cost less will be the these there are other variables like concentration and performance of the financial institution (Rihall, et al., overhead cost. An empirical result shows the positive 1994). relation between concentration and overhead cost with Coefficient of interst rate is negative and highly poverty. As concentration decreases the number of rivalsignificant. Higher interst rate leads to decrease poverty in banking sector because different banks merge withbecause more money is distributed among the one another and also decreases the choices with thedepositors. A developed financial system is one that has customers, and the increase of overhead cost is alsoa secure and efficient payment system in the form of harmful for financial sector development if it is not fairlyinterest (Johann Scharler). Stock market turnover ratio is managed. All these stated factors about concentrationnegative. Private bond market capitalization have and overhead cost hamper the financial development.negative and highly significant effect while that of References Références Referenciasgovernment bond capitalization has positive butinsignificant effect on poverty. The reason for the 1) Asli Demirguc-Kunt and Ross Levine,” Band –negative effect of private bond capitalization on poverty Based and Market –Based Financial System :is that private sector raises fund through bond market Cross – Country Comparison”mainly for the expansion of firm which leads more output 2) Bencivenga and Smith , 1991, “ Financialmore emplyment more incme and less poverty. While on Intermediation and Endogenous Growth “ ,the side government uses bonds for raising fund for Review of Economic Studiesmeeting its deficit which must be repayed along with 3) Collin Kirkpatrick, 2000,” Financialinterst by the consumers in form of taxes. It will Development, Economic Growth, and Povertyadversely effects consumers and leads to more poverty. Reduction. ©2011 Global Journals Inc. (US)
  • 5. Financial Sector Development And Poverty Reduction. 4) Deininger, K., and L. Squire (1996) A New Dataset Measuring Income Inequality. World Bank Economic Review 10 5) De Gergorio, 1996,” Borrowing Constraints, Human Capital Accumulation, and Growth”, Journal of Economic 6) Gurley, J and Shaw, E, 1967,”FinancialApril 2011 Structure and Economic Development” Economic Development and Cultural Change 7) Greenwood and Jovanvic, 1990, “Financial Development , Growth and the Distribution of62 Income”, Journal of Political Economy 8) Hulme and Mosley, 1996, “Finance AgainstVolume XI Issue V Version I Poverty Volume 1” Rutledge , London 9) Isaksson and Levin, 1997,: Financial Development and Economic Growth: Views and Agenda” , Journal of Economic Literature , Vol .XXX 10) Johan Scharler,” Do Bank-Based Financial Systems Reduce Macroeconomic Volatility by Smoothing Interest Rates?”The Importance of Financial Sector Development for Growth and Poverty Reduction Policy Working Paper 11) Lipton, M., and M. Ravallion (1995),” Poverty and Policy”. Handbook of Development Economics. Volume IIIB.Global Journal of Management and Business Research 12) McKinnon (1973) “ Money and Capital in Economic Development “, Washington DC: Brookings Institution 13) Patrick, 1966, “Financial Development and Economic Growth in Underdeveloped Countries”, Economic Development and Cultural Change 14) Prager, R. and T. Hannan (1998), "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics 46(4), pp 433-452. 15) RHAIL, DENIS, HRECHAK, ANDREW,1994 ,” IMPROVING FINANCIAL INSTITUTION PERFORMANCE THROUGH OVERHEAD COST MANAGEMENT” JOURNAL OF BANK AND COST MANAGEMENT ACCOUNTING 16) Sylviane Guillaumont Jeanneney and Kangni Kpodar, 2005),” Financial Development, Financial Instability and Poverty” 17) “The Importance of Financial Sector Development for Growth and Poverty Reduction Policy Working Paper” DFID Policy Division Working Paper 2004 ©2011 Global Journals Inc. (US)